It is widely believed that the Asian emerging economies are leading the world economy to recover from its worst crisis of 2007, since the ‘Great Depression’ of 1930s. After observing the GDP growth figure of 8.8% in the first quarter of FY 2010-11 (begins from April 2010 and ends in March 2011), it is understood that the expectations on India are not misplaced. The Planning Commission has released the data for Q1 last Tuesday. India’s GDP has grown by 8.8% from 8.6% of its previous quarter i.e. 4th quarter of previous financial year 2009-2010 despite partial withdrawal of stimulus measures. It is the highest growth rate since last quarter of 2006-07. The GDP growth of Asia’s 3rd largest economy after China and Japan is particularly notable because of the slow pace at which the GDPs of the developed economies like the US, Japan and the EU have grown in the same period.

As per the data released the robust GDP growth is driven by equally robust manufacturing sector growth that grew by 12.4 percent against 3.8 percent in the same period of last fiscal year. Agriculture and allied activities also fared well which expanded by 2.8% against 1.9% in Q1 of FY10. India’s Prime Minister Dr. Manmohan Singh has been advocating that agriculture sector has to grow by at least 4% for India’s GDP to grow by double digit figure. The Finance Minister Pranab Mukherjee expressed confidence that Indian GDP growth would register the targeted figure of 8.5%. The Deputy Chairman of the Planning Commission Montek Singh Ahluwalia is even more optimistic of GDP growth rate for the present fiscal surpassing the targeted figure of 8.5%.

Leading regional gains, Australia’s S&P/ASX 200 jumped 1.7 percent to 4,478.8. Investors cheered new data showing that the nation’s gross domestic product rose a seasonally adjusted 1.2 percent in the April-June quarter. In China, manufacturing posted the first gain in four months. The state-affiliated China Federation of Logistics and Purchasing said its purchasing managers index, or PMI, rose to 51.7 in August from 51.2 July and 52.1 in June. Numbers above 50 show manufacturing activity expanding. "The rise in the PMI for August shows that China’s economy will not suffer a serious correction," the report said, citing federation analyst Zhang Liqun.

China has overtaken Japan to become the world’s second-largest economy, the fruit of three decades of rapid growth that has lifted hundreds of millions of people out of poverty. Depending on how fast its exchange rate rises, China is on course to overtake the United States and vault into the No.1 spot sometime around 2025, according to projections by the World Bank, Goldman Sachs and others. China came close to surpassing Japan in 2009 and the disclosure by a senior official that it had now done so comes as no surprise. Indeed, Yi Gang, China’s chief currency regulator mentioned the milestone in passing in remarks published on Friday. "China, in fact, is now already the world’s second-largest economy," he said in an interview with China Reform magazine posted on the website (www.safe.gov.cn) of his agency, the State Administration of Foreign Exchange. Cruising past Japan might give China bragging rights, but its per-capita income of about $3,800 a year is a fraction of Japan’s or America’s. "China is still a developing country, and we should be wise enough to know ourselves," Yi said, when asked whether the time was ripe for the yuan to become an international currency.

CAN IT BE SUSTAINED?

China’s economy expanded 11.1 percent in the first half of 2010, from a year earlier, and is likely to log growth of more than 9 percent for the whole year, according to Yi. China has averaged more than 9.5 percent growth annually since it embarked on market reforms in 1978. But that pace was bound to slow over time as a matter of arithmetic, Yi said. If China could chalk up growth this decade of 7-8 percent annually, that would still be a strong performance. The issue was whether the pace could be sustained, Yi said, not least because of the environmental constraints China faces. In an assessment disputed by Beijing, the International Energy Agency said last week that China had surpassed the United States as the world’s largest energy user. If China can keep up a clip of 5-6 percent a year in the 2020s, it will have maintained rapid growth for 50 years, which Yi said would be unprecedented in human history. The uninterrupted economic ascent, which saw China overtake Britain and France in 2005 and then Germany in 2007, is gradually translating into clout on the world stage.

China chalked up unexpectedly strong annual growth of 11.9 percent in the first quarter, prompting renewed calls for tighter policies to prevent the economy from overheating and stoking speculation on when it will loosen its tight grip on the yuan. The rate of expansion, the fastest since 2007 and above the median forecast of 11.5 percent in a Reuters poll, was flattered by a low base of comparison a year earlier, when the economy was reeling from the global financial crisis. But economists said the figures, released on Thursday by the National Bureau of Statistics, were unquestionably sturdy and would justify a firmer policy stance. Some, but by no means all, economists advocated a pre-emptive rise in interest rates to curb inflationary pressures, while Glenn Maguire with Societe Generale in Hong Kong said he favoured a prompt revaluation of China’s currency.

"Yuan stability and China’s stimulus package made an enormous contribution to global stability in the aftermath of the crisis, but now that China’s economy is growing by 12 percent, it’s time for China to share some of that growth with the rest of the world via appreciating its exchange rate," he said. The Commerce Ministry promptly reaffirmed its opposition to a stronger yuan. A spokesman said Washington was wrong to argue that, by holding down the currency, Beijing was giving Chinese exporters an unfair competitive edge and thereby contributing to near double-digit U.S. unemployment. The yuan, also known as the renminbi, rose modestly in the offshore forwards market, which was pricing in a 3.2 percent rise against the dollar over the next year. That was barely changed from the day before, even though Singapore had fanned market talk of a strengthening in the yuan by pushing up the value of the Singapore dollar on Wednesday in response to blistering growth data.

Asia needs to start raising interest rates to prevent inflation from accelerating and avert the formation of asset bubbles as the region’s economies recover from the global crisis, the Asian Development Bank said. The region will probably expand 7.5 percent in 2010 after growing 5.2 percent in 2009, which was the slowest pace in eight years, the Manila-based lender said in its Asian Development Outlook report today. The 45 economies of developing Asia may grow 7.3 percent next year, the ADB predicts. Asia is leading a recovery from the deepest global recession since World War II after the region’s governments pumped more than $950 billion into their economies through increased investment, tax cuts and cash handouts to boost growth. Some central banks are already raising borrowing costs or taking steps to remove the excess cash in their banking system to fend off inflationary pressures.

“As recovery takes hold, inflation pressures, particularly in asset prices, may well start to mount in the region,” the ADB said. “Unusually easy monetary policy throughout the region cannot be kept for too long, and there is a need to revert to a normal stance.” Central banks in Malaysia, India and Vietnam have raised interest rates, while China has required banks to set aside more funds as reserves to drain money from the economy. Others, including Indonesia and South Korea, have left borrowing costs unchanged to buttress their recoveries.

Expansionary Stance

“While additional fiscal measures are unlikely to be implemented this year, monetary measures are expected to continue to support the recovery process by maintaining an expansionary stance,” the ADB said. “Authorities must choose the right timing to withdraw the exceptionally accommodative monetary stance. If

Inflows of speculative capital, or “hot money,” are contributing to volatility in China’s stock and property markets, said Fan Gang, the academic member of the central bank’s monetary policy committee. While the inflows help make it cheaper to borrow, “it will also cause asset bubbles,” Fan said at a financial forum in Beijing today. He also said that capital will keep heading into emerging markets for “a considerable period” because of limited or zero growth prospects in the industrialized economies. Fan’s warning comes a day after Premier Wen Jiabao pledged to tackle excessive property-price increases in some parts of the nation, citing taxes and loan rates as possible tools. China’s policy makers are trying to secure an economic rebound while avoiding the stock and housing bubbles that plagued the U.S. this decade.

While the Shanghai Composite Index has fallen more than 8 percent from this year’s peak in August, it remains up 75 percent for 2009. China’s property benchmark, which measures prices in 70 cities, rose the most in 16 months in November. Fan is among Asian officials who have warned in recent weeks that the U.S. Federal Reserve’s policy of keeping its benchmark interest rate near zero is spurring global liquidity that’s heading to emerging markets. Continue reading →

Beijing will not relax its efforts to sell Chinese products overseas in 2010 and seek a bigger share in the global market, China’s vice trade minister said on Sunday. China, which may have replaced Germany to be the world’s largest exporter in 2009, is a “big trading nation” but not yet, a “powerful trading nation,” vice commerce Minister Zhong Shan said. “China’s exports in 2010 will grow, and there’s no doubt about that,” Zhong said, declining to provide detailed forecasts. China’s exports were hit hard by the global financial turmoil, falling 18.8 percent in the first 11 months from a year earlier. But the market share for Chinese products has increased in 2009 as sales from other countries have fallen even more deeply, Zhong told a forum at the University of International Business and Economics in Beijing.

Other countries have blamed China’s unofficial policy of repegging the Yuan to the dollar since the summer of 2008 for making its products artificially competitive. China will feel pressure on its Yuan policy but will maintain “basic stability” Zhong said, in a reiteration of long-standing government policy. He said export growth is vital for China to drive economic growth and create jobs Continue reading →